For a long time Irish history was marked by a surprising degree of consensus in favour of a united Ireland – whether as a united and politically independent island or as part of the United Kingdom. Since 1922, there has been a marked lack of consensus about where Northern Ireland’s future lies. Partition reflects that lack of consensus. Economists are seriously at a disadvantage if they ignore the pervasive and enduring significance of national sentiment and identity. The death of the nation state has been exaggerated notwithstanding the undeniable triumph of global capitalism and increasing irrelevance of borders to the flow of trade, ideas and persons. In a way, the failure of the European Union – to date – to build a strong political governance among its member states reflects the lack of an overarching ‘national story’ that would bind together disparate languages, cultures and peoples (such as happened in the great melting pot of the USA).
The question of united Ireland was the subject of an unusual one-off joint RTE-BBC live debate last week.
One of the ironies of the programme is that: viewers in the Republic of Ireland may view the programme here 
(as of 9/11/2015) while viewers in Northern Ireland may view the programme there (and Republic of Ireland viewers cannot access the latter). So much for cross-border integration!
The debate focussed on many issues including the possible ‘economic cost’ of a united Ireland. At the outset three things must be acknowledged in this blog:
- The constitutional position of Northern Ireland is a matter for the people of Northern Ireland and this has been copper fastened in the 1998 Good Friday Agreement.
- Any possible constitutional change is a very long way off by any reasonable reckoning and assessment of existing attitudes and realities.
- It is not appropriate on this forum to advocate a change or endorse the continuing status quo. That is a matter for others.
What is important is that the debate on the future of Northern Ireland is informed by:
- The evidence about how the economies and associated fiscal powers of the main jurisdictions (the UK and the Republic of Ireland) operate on these two islands (Ireland and Great Britain)
- A consideration of how a better economic and social future can be secured with or without constitutional change.
In the past, the union between Northern Ireland and Great Britain was defended on economic as well as other grounds on the basis of the claimed benefits flowing from integration into the much larger British and commonwealth or imperial markets as well as the economic and political backstop of a strong united kingdom. The demise of manufacturing, in Northern Ireland, and the huge shifts in global power and trade position of the UK means that these claimed benefits are less obvious today than was the case 100 or even 50 years ago. From being a basket case economy southern Ireland showed remarkable dynamism and growth potential from the 1960s onwards and especially during the period of rapid growth in 1993-2007. By the turn of this century the south had overtaken the UK and Northern Ireland in terms of GDP per capita.
Advocates of a united Ireland frequently use economic arguments to make the case for unity on the grounds that an island economy would benefit from integration and lowering of costs and inefficiencies associated with two separate jurisdictions and currency areas, etc. There is some truth in this claim (although difficult to assess because it is a very hypothetical one). It is also the case that Northern Ireland benefits from integration in to a single large UK market while both Ireland the UK benefit from partial integration into a much larger market of 500 million in the European Union.
Two key inter-related questions arise in debates about these matters:
- The extent of fiscal transfer from the UK centre to Northern Ireland
- The hypothetical ‘cost’ to the southern Irish taxpayer of a united Ireland.
It is important to distinguish these questions for reasons to be explained shortly.
Net fiscal transfer
The ‘Net Fiscal Transfer’ is the estimated value of the difference between, on the one hand, what Northern Ireland contributes by way of total taxes and government revenue collected (most of which is remitted to the central UK authorities), and on the other, what is spent by public authorities for and by and in Northern Ireland. The reference to ‘for’ and ‘by’ and ‘in’ is important!
The Department of Finance Personnel (DFP) report ‘Net Fiscal Balance Report, 2012-13 and 2013-14’ provides an estimate of the overall position with regard to ‘for’, ‘by’ and ‘in’ as well as splitting out the ‘in’ by means of ‘identifiable’ public spending in Northern Ireland. The methodology used in the DFP report is that used by the Scottish Government in its annual publication ‘Government Expenditure and Revenue in Scotland ’ (GERS). Using this methodology ‘non-identifiable’ expenditure refers to spending undertaken at UK level and which cannot be decomposed on an individual regional level. Key examples would include the service of national debt or the cost of the UK military (except where, perhaps, components of military spending can be identified with a particular region). Strictly speaking, spending ‘for’ a region such as Northern Ireland may take place at central (Whitehall) level in government departments dealing directly with payments, receipts or administration of Northern Ireland.
Non-Identifiable Expenditure is considered to occur on behalf of the UK as a whole and cannot be decomposed on an individual country or regional basis. It is standard practice in studies of inter-regional government transfers to apportion or estimate part of national ‘overheads’ to a specific region even when these costs cannot be directly associated with the region. The rationale is that all regions, without exception, are implicated in the cost or revenue. In the case of regional transfers among the regions of the Republic of Ireland a similar type of apportioning exercise is undertaken by researchers.
In summary, the DFP report estimates a total government revenue of £14.9 billion in 2013-14 compared to a total of £24.1 billion in public spending. However, when ‘non-identifiable’ spending is excluded total spending came to £20.1 billion. So, depending on which measure of spending is used, the ‘net fiscal deficit’, in 2013-14 was £9.2 billion or £5.2 billion.
An important fact not considered in the current debates is that the share of total government revenue in total regional income (GDP if you like), in Northern Ireland, is approximately 50%. This is hugely above what it is in the Republic (35%) and in the rest of the UK. In area of health spending less than 10% of households in Northern Ireland purchase private health insurance compared to a corresponding figure of nearly 50% in the Republic. The difference is explained in three letters: NHS. Would Northern Ireland taxpayers be willing to pay less tax to have a three-tier health service such as is the case in the Republic? Perhaps this question should have been asked in the recent RTE/BBC survey?
Controversy about size of net fiscal transfer
The methodology used in the DFP report has been the subject of controversy (see ‘The Economic Case for Irish Unity ’). Apart from the question of ‘non-identifiable’ expenditure there have been questions about what parts of administrative spending ‘for Northern Ireland’ by Departments located in Britain should be included as well as estimations of tax receipts from households and corporations. It is suggested, for example, that the DFP report under-estimates Northern Ireland taxes paid by UK companies headquartered in Britain but sourced in Northern Ireland. While this is a possibility it is unlikely to be that large. The DFP report, on page 46, provides a summary of the various official data sources used in estimating revenue streams. The report authors are careful to point out the following:
Particular caution should be used in relation to individual components of the fiscal balance as many revenue streams have been estimated and are not true values.
Were an alternative approach to be taken using HM Revenue Commissioner estimations total government revenue for Northern Ireland would be £14.3 billion instead of £14.9 per DFP report – widening the estimated fiscal deficit to £9.8 billion.
Whatever about revenue estimate differences, is it legitimate to include non-identifiable spending in regional estimates of fiscal transfer? I believe that the answer is yes. It is a standard part of regional economic analysis and is reflects the extent to which transfers act to reduce inequalities by region. This is the pattern in many countries where regional disparities exist such as in Italy, Germany, France and even the Republic of Ireland (difficult as it is to measure regional transfers).
Would unity lead to higher taxes in the south?
So much for net fiscal transfers. Estimation of how much a united Ireland would cost the southern taxpayer (and not forgetting about the Northern taxpayer) is quite another matter. And this is where the story gets even more complicated!
If, hypothetically, in the year 2115 Northern Ireland were to leave the UK and be united with what is now the 26 counties to form a single all-island state what might the implications be for fiscal policy in Ireland?
To keep things simple for now let’s assume no change in GDP or its components for both parts of Ireland. (It may be objected that a united Ireland would release new possibilities and economic activity so as to boost productivity and government revenues. This might or might not be the case and the burden of proof rests with those making these claims.) On the basis of no policy change and no change to GDP, it is clear that a unification of Ireland would entail some additional financial cost to the government of a united Ireland compared to the current situation. After all Northern Ireland is the poorest region of the UK and if there is a transfer to it such as there is to Northern England regions then a transfer to the North of Ireland post-reunification is not unlikely.
That part of the net fiscal transfer from London to Belfast which relates to ‘identifiable’ spending (approximately £5 billion or €6 billion) would be required to maintain Northern Ireland public services at the current 2015 levels. But, the story does not end there. Living standards (and social transfer payments) in the Republic are significantly higher than they are in Northern Ireland so that there would have to be a process of adjustment over a number of years to bring the north up to the standards of the south. This would be analogous to the post-reunification German solidarity tax of 5-7% on all incomes (the size of an Irish unity solidarity tax may not be as big as that).
What of the ‘non-identifiable’ spending? There is a point that this spending would not be relevant particularly if any reunification scenario Northern Ireland’s notional share of UK national debt were written off under the new arrangements. Instead of sharing in the UK national debt, Northern Ireland would now share in Irish national debt and the annual cost of servicing it (as well as Irish national administrative overheads). In this case, southern taxpayer may not necessarily have to pay more by way of tax. The national debt (and its annual servicing cost) would simply be shared among 32 counties rather than 26. However, given the ‘unknown unknowns’ Irish national debt might be higher than would otherwise be the case because of reunification due to lingering structural features of the Northern Ireland economy and society. And security costs might be higher than might otherwise be the case were there an absence of near universal enthusiasm for a united Ireland among both communities in Northern Ireland (a simple voting majority within Northern Ireland would not be enough to ensure enduring political stability and near universal buy-in by sides of the community).
What sort of society do we want?
The harsh reality so often avoided – North and South – is that unless we wish to turn Ireland into a prototype of a low-tax and low-public spend economy such as prevails in the USA then taxes will have to increase especially in the South where a rising and ageing population will require additional taxes to pay for public services in education and health. This is why a policy of cutting income taxes in the South is socially inequitable, fiscally irresponsible and economically damaging and not supported by any solid empirical evidence (see a recent working paper by my colleague Dr Tom Mc Donnell – Cultivating Long-run Economic Growth in the Republic of Ireland).
The first question to be considered is not where to draw political lines on maps but what quality of society and economy we wish to establish in Ireland and in Britain. And it should not be forgotten that integration of the island economy especially in areas such as energy, health and agri-business does not necessarily require Northern Ireland's exit from the UK. However, a Brexit could change all that quickly. Beware of black swans.
It can be safely concluded that the south as well as the north have a lot of work to do to transform their respective economies and societies to make unity attractive if such were to be seriously proposed. However, at the end of the day, these matters will be resolved on the basis of political choices by all of the peoples of this island reflecting historical and social ties and loyalties.